If you are a business owner considering engaging with an investor or an acquirer, you need to be able to succinctly explain your company’s financial position – tell your business’ financial story.
The financial story of your business is a comprehensive summary of your company’s past financial performance and current financial position that provides anyone looking at the business with the context they need to understand the company’s current situation and prospects.
A well-developed financial story will not only present the key numbers and identify the apparent trends. It will also pre-empt the inevitable questions that any anomalies – both to the upside and to the downside – will raise.
For established companies, as opposed to start-ups, the financial story should cover the previous five years. This is generally seen as long enough to identify trends and to also see how the company performs over a sustained period.
In this post, we will systematically assemble the financial story of Saunders International Limited (“Saunders”), the ASX-listed construction, engineering and maintenance business that services the industrial, infrastructure, water, mining and oil & gas industries.
To do so, we will be relying solely on the company’s published annual reports. Please note that the information contained below is presented for illustrative purposes only and should be considered in relation to CFSG’s disclaimer.
The Financial Story of Saunders
In presenting Saunders’ financial story, it is important to recognise that analysis is not a complete review of every aspect of the company’s finances. It’s about presenting a comprehensive overview of the most salient aspects of the business’ performance.
The goal is to be open and transparent and to provide a snapshot of the key dimensions of the company’s performance and in doing so, provide the user with enough information to decide whether they wish to dig deeper into the company.
Revenue
The standard starting point for telling a company’s financial story is revenue. The amount of revenue a company generates gives an immediate indication of its size, and the rate of change in revenue is an excellent measure of a business’ overall momentum.
Looking at Saunders’ revenue performance over the past five years, revenue dipped substantially from FY2014 and FY2015. That decline stabilised during FY2016 and FY2017 and then reversed significantly during FY2018.
Anyone looking at these headline figures will ask why revenue has this ‘U’ shape. According to Saunders, revenue fell in FY2015 because of a general decline in commodity prices, which caused the company’s customers to delay capital and operational expenditure.
The reason why revenue grew substantially over FY2018 was two-fold: First, the company booked a full year of revenue from its February 2017 acquisition of Civibuild and, second, Saunders completed several large tank projects during the year.
This very brief synopsis of the company’s five-year revenue performance provides a lot of valuable information about the business: it is influenced by commodity prices, revenue has an element of lumpiness (ie. large projects) and its growth strategy includes acquisitions.
Earnings
Having looked at revenue, the next standard series of metrics to look at are earnings, specifically Earnings Before Interest, Tax, Depreciation & Amortisation (EBITDA), Earnings before Interest & Tax (EBIT) and Net Profit After Tax (NPAT).
While revenue provides insight into the overall size and momentum of a company, it does not indicate whether the business is profitable. For established companies, unlike arguably high-growth start-ups, profitability is key.
Looking at Saunders’ earnings performance, earnings have been steadily declining over the last five years and in FY2018 turned negative.
Over the course of FY2014 through FY2016, the company’s earnings performance was adversely affected by challenging market conditions that saw contracts being awarded more slowly and greater levels of competition for awarded contracts eating into margins.
These market realities motivated the companies to seek an acquisition, Civibuild, that would diversify the company away from the mining and oil & gas industries. This acquisition was completed in FY2017.
The headline loss for FY2018 was principally caused by two loss-making projects stemming from client delays and cost overruns.
It is also important to recognise that Saunders booked a restructuring charge of circa $1.5m for Fy2018. Removing the impact of this one-off cost, the company’s EBITDA improves from -$3.2m to -$1.8m.
Cash Flow
It is also important to offer insight into the company’s cash flow performance. What is clear is that Saunders’ deteriorating earnings over the last five years has seem a similar deterioration in the company’s cash flows.
There are several specific aspects of the company’s cash flow performance that are worthy of discussion.
Saunders does not have particularly high capital expenditure requirements. On average, annual payments for property, plant & equipment over the five years have been $683K. For a detailed overview of capex, please click here.
The company has been consistently paying a dividend. However, that dividend has fallen from $3.9m in FY2014 to $1.9m in FY2018.
The company has raised $1.3m and $7.9m in equity from investors during FY2017 and FY2018 respectively.
Financial Position
Turning to the company’s balance sheet, Saunders financial position is strong. The company has more cash and cash equivalents than it does total current liabilities and its levels of borrowings are effectively immaterial.
This strong financial position has certainly been aided by the company’s recent capital raising.
The preceding discussion is certainly not a comprehensive financial analysis of Saunders. There are many aspects of the company that have not been addressed such as working capital management, returns on capital, forecasts and so on.
However, sufficient information has been presented to give an outsider a reasonable introduction into the business’ financial performance and position – certainly enough to help them decide whether they wish to dig deeper.
Being able to provide a similarly succinct overview of your own company’s financial performance is an essential first step to engaging with a prospective investor or acquirer. If you would like to have a confidential discussion about CFSG can assist your business, please contact us.
